Small miners buoyed by Chinese boycott threat

Shares in small and mid-tier iron ore miners have surged as Chinese steel mills threaten a boycott of the bigger players over "monopolistic behaviour".

Transcript

WHITNEY FITZSIMMONS, PRESENTER: Shares in small and mid-tier iron ore miners have surged on higher commodity prices and the prospect of a boycott of the biggest players by Chinese steel mills.

The China Iron and Steel Association has called for a two-month freeze on orders from BHP Billiton, Rio Tinto and Brazil's Valle, as China fights back against what it calls monopolistic behaviour.

But analysts have dismissed the move as grandstanding and say the tactic could backfire.

Frances Bell reports.

FRANCES BELL, REPORTER: China is the world's biggest consumer of iron ore and its insatiable demand for the commodity is helping push prices back towards record highs. At the same time, China is losing its battle to maintain annual contracts for iron ore.

GAVIN WENDT, ANALYST, MINELIFE: The Chinese are always prone to brinkmanship at this time of the year when it comes to the annual iron ore price negotiations and this year doesn't look as though it's going to be any different.

FRANCES BELL: The China Iron and Steel Association, or CISA, says there's enough iron ore in stockpile to supply local steel producers for two months.

If that stockpile is exhausted, analysts estimate domestic iron ore production would only satisfy about a third of demand, so Chinese steel mills would have to go back to overseas suppliers.

That prospect sent shares in Australia's junior iron ore miners higher. Pilbara-based Atlas Iron was up almost seven per cent by the close with more modest gains by FMG and Gindalbie.

JOHN LEE, CENTRE FOR INDEPENDENT STUDIES: They could source maybe an additional third from small producers, but the problem is quality and therefore cost.

The iron ore produced by the three big producers are by far the best in quality, the best in grade and therefore the cheapest.

So I think it would actually be spiting themselves if they were to go in this direction.

FRANCES BELL: The CISA has a poor track record of coming out on top in iron ore price negotiations.

It was in charge of last year's talks which eventually broke down amid the arrest of Stern Hu and his three Rio Tinto colleagues.

John Lee says the CISA is not the mouthpiece of all steel producers in China as it represents 16 large state-owned mills in an industry of more than 500.

However, he says the boycott proposal shows the organisation is under pressure.

JOHN LEE: Beijing blames the CISA for not just a failure of the negotiations in 2009, but the actual breakdown of the contract pricing system for iron ore.

Now because China is now forced to buy iron ore in the spot market and prices have risen around 90 per cent above what it was 12 months ago, the CISA feels under enormous pressure to fix this situation, and the only way that they know how to do it is a rather ham-fisted way of threatening to boycott the three largest iron ore producers.

FRANCES BELL: ANZ's head of commodities research Mark Pervan says with a strong demand for iron ore expected to last for another four to six years China will have to get used to paying higher prices on shorter contracts.

But he doesn't believe the recent surge in prices is in danger of creating an iron ore price bubble.

MARK PERVAN, HEAD OF COMMODITIES RESEARCH, ANZ: What may be slow or a bubble-type environment right now is the ability for the steel mills to raise steel prices and absorb what is a smaller impact from a cost point of view through higher iron ore prices through raising steel prices at a smaller amount.

FRANCES BELL: But the surge in iron ore prices and the phasing out of the benchmark pricing system has caught the attention of the ACCC, which is assessing BHP and Rio's proposed Pilbara iron ore joint venture.

For the second time in six weeks, it has asked for more information from the two companies and extended its investigation by another month.

Gavin Wendt says the deal is looking less attractive for Rio Tinto by the day.

GAVIN WENDT: If you have a look at the payment that BHP has to make to Rio Tinto in terms of equalisation of the joint venture, it's basically not enough.

Certainly as times have changed over the last 12 months and iron ore demand has increased and prices have increased, that particular deal is looking less attractive to Rio Tinto than it is to BHP.

FRANCES BELL: The ACCC is expected to announce its findings at the end of May.